Shippers and manufacturers want it in their inventory flow. Carriers on the ocean, land and in the air certainly crave it in the demand for and supply of their vessels. And the Obama administration is into a second year of a national initiative to bring more of it to imports and exports.
What they are looking for, of course, is balance. As 2012 begins, that’s the strategic goal as companies up and down the supply chain seek to eliminate the wild swings that have kept them on a yo-yo for the past three years.
In some ways, we enter 2012 very much as we entered last year, when companies were looking to sustain 2010’s rapid recovery. Optimism among retailers is growing amid a strong holiday shipping season, raising the specter of an inventory rebuilding — in the short term, at least — that could prop up freight carriers in the first part of the year.
But there also is a sense of foreboding. On the international front, Europe’s sovereign debt crisis again threatens to throw the global economy into recession. In China, weak U.S. and European demand for imported goods is slowing the economy, and rising labor costs there have manufacturers seeking new sourcing markets.
In the U.S., shippers and motor carriers are struggling with a shortage of drivers that may intensify if Washington further restricts trucker hours-of-service. And, of course, the debate will grow in this election year as to what’s more run down, the nation’s infrastructure or the political engine charged with funding roads, bridges and ports.
As 2011 wound down, The Journal of Commerce discussed these and other critical supply chain issues with four prominent shippers: Casey Chroust, who represents the nation’s largest retailers at the Retail Industry Leaders Association; Wayne Johnson, manager of global carrier relations at Owens Corning and chairman of the highway committee of the National Industrial Transportation League; and Doug Grennan and Sean Healy of agricultural products exporter Scoular.
“I’m going to remember 2011 as a roller-coaster ride,” Chroust said.
With so much on the line, some semblance of balance in 2012 would be a welcome relief. Will you get it?
4th Annual Shippers Roundtable
Retail Industry Leaders Association
Casey Chroust serves as executive vice president of retail operations for the Retail Industry Leaders Association. He leads RILA’s efforts in the association’s four key retail disciplines — supply chain, finance, human resources and asset protection — as well as enterprise-wide issues, which include sustainability, risk management and information technology. He manages all best practice, benchmarking and research initiatives as well as educational programming and executive networking to promote operational excellence within the industry. Prior to joining RILA in 2007, Chroust spent a decade at BearingPoint, formerly KPMG Consulting, in its retail management consulting practice. In this capacity, he consulted with numerous Fortune 500 retail companies and their senior executives on strategic initiatives within store operations, supply chain, merchandising and store development. He lived overseas for several years working for international retailers in England, Peru and Thailand.
Wayne Johnson is manager of global carrier relations for Owens Corning in Toledo, Ohio. A 35-year logistics veteran, he has worked for shippers, trucking companies and as a teacher in the field of transportation and accounting. Johnson also serves as chairman of the National Industrial Transportation League’s Highway Committee and serves on the board of the Rail Committee. He is on the board of governors of the Southwest Association of Railroad Shippers, served on the executive board and as treasurer for Americans for Safe & Efficient Transportation and as a member of the Saving Our Service Association. He received the 2010 McCullough/NITL Executive of the Year Award. He received his B.A. from Iowa Wesleyan College, with majors in business, transportation and accounting.
The Scoular Company
Doug Grennan is senior manager of Scoular’s International Container Trade Group and is responsible for merchandising containers of bulk agricultural products from North America to Pacific Rim destinations. He joined Scoular as a grain merchandiser in 1994, merchandising agricultural commodities by truck and rail in the eastern United States. A native of Wisconsin, Grennan graduated from the University of Wisconsin-Madison with a B.S. in Agricultural Economics and International Trade. Prior to joining Scoular, he spent four years with Peavey Co. in Madison, Wis., managing operations and grain merchandising for two grain elevators. Grennan is also vice chairman of the U.S. Soybean Export Council.
The Scoular Company
Sean Healy is supply chain manager of Scoular’s International Container Trade Group. He is responsible for the BCO supply chain and ocean carrier relations. Healy has more than 15 years of experience in the international trade and transportation industry, working for such companies as Arthur Andersen, Wessco International and C.H. Robinson. He has managed import-export supply chains, ocean carrier contract negotiations and import compliance programs. He graduated from the University of Nebraska with a B.S. in Economics.
JOC: When 2011 started, it was billed as the year to sustain the recovery. It didn’t end up that way. How will you remember 2011?
WAYNE JOHNSON: For me, 2011 was a year of warnings of things to come. It was a year of new norms. The capacity crunch was pretty hard from February through June or July. On the flatbed (trucking) side, vans stayed pretty loose throughout the year, though there were some shortages here and there. Overall, I looked at it as a warning of what’s coming in 2012 and 2013. It is going to be even more problematic for shippers as we’ll have to face more shortages of capacity and higher demand.
JOC: What’s the basic state of your market, housing, in particular?
JOHNSON: Housing in 2011 started out pretty strong but fell pretty low. Housing starts hit about 610,000 to 620,000 a year, compared with the all-time record of 2.2 million in 2006. So you can see we’re still in the doldrums in that market. 2012 will be another flat year for housing, with predictions of housing starts being no more than 620,000 or 630,000. We’re predicting it will be a little higher than that. We’re hoping for a little more, but it’ll be another year of modest housing gains.
CASEY CHROUST: I’m going to remember 2011 as a roller-coaster ride, with lots of ups and downs. The year started out with lots of optimism that quickly waned in the spring and into the summer when the macro-factors for a recovery started to tail off. We started to see a rebound last fall and into the holiday season. Retail sales boomed at the start of the holiday season, so we’re back at another high point in terms of optimism and sentiment. One thing that did remain a constant through all of this was retailers’ focus on the customer and the core fundamentals of their business. They definitely maintained tight cost controls. Everything was about serving the customer and ensuring they were making the most of the situation.
JOC: Do the strong holiday sales tell us something that’s to come, or were they more of a onetime sugar rush?
CHROUST: If you look back over the last several months, we’re seeing many retailers have very strong year-over-year sales figures and continuing to post good numbers. So coupled with the strong holiday season, we’re starting to see some signs of permanence of the recovery. Retailers are hopeful that these sales gains will be sustained into 2012. But we had a good holiday sales season in 2010, too, and by the time we got to last spring, the bottom had fallen out. So I think there is still some caution in the air among our retailers.
SEAN HEALY: From an export perspective, 2011 numbers were very similar to 2010. Generally speaking, we were able to get the equipment we needed on all intermodal levels to execute our business. We made significant progress with our ocean carriers regarding the implementation of volume- and time-based commitment contracts. And we were able to more effectively track our trade performance, and our booking-fulfillment rate increased over our 2010 levels. We feel our ocean carriers also have become more cognizant of the agriculture export market and our need for stable pricing 60 to 90 days out rather than 30 days out. Looking to 2012, we’ll continue to openly share market information with our carrier partners in hopes of increasing transparency of our export market overall. We’ll look to improve our forecasting abilities and increase our ability to load containers with agricultural products at U.S. origins where there are typically surplus container supplies.
DOUG GRENNAN: We recognize as ag product exporters that we exist in a backhaul world. Capacity is brought to us from an importer and that’s what drives our capacity for export. But we’ve noticed over the past two years or so that carriers are taking their ag product export revenue pretty seriously. As rates on the eastbound side have experienced attrition for a lot of reasons, they’re paying attention to their export revenue as a pretty significant part of their bottom line. So they’re getting smarter about pricing that at market rates to get as much out of it as they possibly can. I think we’ll continue to see that knowledge-building and awareness in 2012.
JOC: What else are you watching for 2012?
GRENNAN: When we think about 2012 and the possible shocks, we look at consolidation being in the news. We’ve already seen MSC and CMA CGM preparing to do some capacity sharing, and we’ve seen comments about the Japanese carriers maybe needing to get together. So I think we need to get ready for more consolidation and what that means to our operations. Does it mean we have to build new relationships with different sales reps, implement different marketing strategies? Does it mean we’re going to have interruptions in the supply chain? History would say that as carriers consolidate or buy each other out, they’ve had some integration problems, and their customers have felt those effects. So we’ll be pretty mindful of that as agricultural exporters and try to avoid those problems as that consolidation develops.
JOHNSON: There probably won’t be many surprises on the rail side, because rail for the past two, three, four years has been on a steady path of increasing rates on shippers. Railroads look at revenue as a set amount they will establish regardless of the volume they receive. I think you’re going to see rates continue to rise 5, 6, 7 percent for most shippers, though if you have some purchasing power, you might see a little less than that. But if you’re a small or captive shipper, you’ll see the normal increases. Railroads’ service is still pretty good, their system is about as good as it’s going to get. They’ve spent a lot of money to get that in place, so I think railroads have the upper hand now and they’re going to keep it for a long time.
JOC: What about the trucking side?
JOHNSON: We just had another 70-truck carrier close its doors on us. I think trucking capacity is going to be an issue going forward because the pricing on trucking isn’t where it needs to be yet. The driver situation is getting worse. The size of their fleets has gotten smaller, and carriers aren’t willing to spend the money to increase them until pricing is where it needs to be so they can make a decent return on the investment. I think you’ll see more mergers going forward. There’s a lot of opportunity out there for carriers to merge and to buy each other up — just to get drivers if nothing else. I think the capacity issue on the truck side will be the leading issue on all cost increases, in the United States anyway, and possibly overseas as well.
JOC: Are you looking to shift some of your truck freight to rail?
JOHNSON: We’ve done that. We’ve done it as much as we possibly can at this time. But we’re also reviewing it every month, and trying to put as much intermodal and as many truckloads on the rails as we possibly can. But it’s hard to do because our customers are ultimately the ones who choose how we ship our product. The demand they have for less inventory at their locations requires us to have more inventory at ours, causing us to have a shorter lead time, therefore trucks are in more demand.
HEALY From our perspective, you’re mostly talking about drayage trucking. That’s certainly not business we can transfer from truck to rail, so our business is different in that way.
GRENNAN: To the extent that trucks become less available in ways that Wayne described, in our business that can impact how far we can dray. How many miles away from the ramp — 100, 200 — can we take a container to go catch a grain load to export out? If we’re flush with drayage capacity, we can travel farther. If we’re not flush with drayage capacity, then that loading effort tends to concentrate closer to the ramp, where you just don’t need as much truck or drayage capacity to make it happen.
HEALY: Overall, over the past 12 months, our costs are up maybe 5 to 10 percent, depending on the region, because of increased fuel costs. As far as our drayage capacity is concerned, it really hasn’t changed. We do find ourselves at certain times, such as at grain harvest, competing for hopper trailer trucks.
JOC: Speaking of costs, how are they shaping up, especially on the ocean side?
CHROUST: There’s been a lot of turmoil with capacity and pricing over the past year or two, so retailers are still gun-shy for 2012. Most of them are planning for the worst and hoping for the best. They’re taking the higher prices of the past year and using them for budget purposes for 2012, just so they can err on the side of caution and safety. Without a doubt, retailers will continue their vigilant focus on cost controls and ensuring that, while the top lines are still recovering, it’s the bottom line that helps maintain margins. You’ll see them continue to streamline operations, push their partners to continue to do more with less.
JOC: We’ve seen historically low inventory-to-sales ratios over the past year or so. Do you see that continuing or will we return to more historical norms?
CHROUST: I don’t think it’ll get back to the historical norm right away, but if the strength of this past holiday season continues and the first several months of 2012 remain strong, I think we’ll see retailers loosen inventory levels somewhat. But I don’t think the doors will be thrown wide open and orders for inventory will come flooding out. Over the past year, retailers definitely erred on the side of selling through inventory instead of having leftover inventory at the end of the selling season. I think that will continue into 2012, but it will become more balanced as the recovery continues to move forward. When the recovery is at full steam, you’ll see them pull the trigger on increasing inventory to try to capture additional gains in sales.
JOC: Do you think there will be enough tightening of capacity on the trans-Pacific to raise rates over the next year?
JOHNSON: Our experience in 2011, as mostly an exporter with plants in 28 different countries, was inflation on inbound shipments to the United States and deflation outbound. I think we’ll see the same activity in 2012, maybe not quite as much deflation on rates out of the United States. I think ocean carriers will continue to face overcapacity through all of 2012. With inventories low, I think everyone’s going to be cautious about what they ship and when.
GRENNAN: Our rates are down about 10 percent now (end-2011) from a year ago in order to compete with the breakbulk delivery model for grains and slack container demand for DDGs to China. Again, as an ag products exporter, the container capacity available for exports is directly reliant on imports, so you can have a scenario where you have lots of capacity and high rates or not a lot of capacity and low rates. How much we as ag product exporters can pay for that capacity is largely determined by rates for breakbulk vessels, which is the standard vehicle for moving grain out of the United States. Our container lines need to be competitive with that, so it’s not all about capacity as a driver of our ag product export rates. In terms of strategy, idling of capacity and what that can do to trans-Pacific rates, I have a different sense of what’s going on right now with the carriers. There’s so much capacity out there, they can tie off and anchor up some boats and maybe they get some rate appreciation out of that, but I don’t know how disciplined as a group they’re going to be to keep that capacity off the water and not go after those higher rates. I think typically they see higher rates, and they redeploy capacity and, all of a sudden, they’re back in the red again. It seems to me with some of the major carriers, they’re going to run these big boats. They feel like they’ve got the efficiencies that they can beat most others in high-density lanes, that the 12,000-, 14,000-, and future 18,000-TEU ships are going to have higher efficiency relative to the 3,500s- and even the 8,000-TEU vessels. I think the big guys will continue to run those vessels, not idle them, and the game will be, who can stay in this? Eventually, there will be idling of capacity because of that, but it may be involuntary idling, not voluntary. I really see that behavior going on for the next 12 to 24 months.
JOHNSON: Slow-steaming is going to have an effect as well. These carriers have gotten more disciplined — some of them, anyway — about their pricing, much like the railroads have done. Slow-steaming has allowed them to do that. I think certain lanes going into and out of the United States and other countries will be profitable for companies, and they’re going to maintain that profitability and raise it as much as they can by taking advantage of certain lanes when they can. I think they’ll be much like the railroads. They’re going to find and have the capacity in place for those lanes while they may abandon others. You might see the ocean carriers, as well, taking the slow-steaming and offering on top of that a premium service to get to a destination one or two or three days faster, and call it an expedited service. That may come out this year as well.
JOC: How are these factors changing your relationships? How would you classify your relationships now compared with, say, early 2010?
GRENNAN: We feel we have very good access to our carriers’ top-line management, so our relationship continues to be about growing the space for container utilization. With the broader ag product marketplace, I think carrier relationships continue to mature. Bulk ag commodity shipping out of the United States in containers is relatively young — 5 or 6 years old. A lot of top management at carriers didn’t understand this business and in some cases didn’t feel the need to understand it back then. It does take some focus to understand the nuances of the ag export marketplace, and they’ve been taking that time over the past two or three years. Now, they’re starting to set some more significant strategy around it. When they think about bringing on these new, big vessels, for example, they’ve got to think about how they’re going to fill them, and not just how, as in the product types and where they’re going to place them in the United States. They have to think about things like how they can fill them quickly. What’s going to be the turnaround velocity? If you’ve got a big boat sitting in Norfolk with a lot of export capacity, you’ve got to go after the right export industries that can load a lot of containers in a short amount of time. The top-line management of these companies and the people in charge of capacity utilization are going to become fairly targeted in the industries they’re going to have to go after on the export side to create that kind of velocity utilization. I also wanted to touch on the (Westbound Transpacific Stabilization Agreement) Advisory Panel put together over a year ago in response to some concerns about how shippers and carriers interacted about capacity, pricing, operations and contractual obligations. I think it’s been a pretty good panel that’s created an opportunity for shippers to air some of their grievances, and carriers get to listen to that perspective. It’s allowed for a lot of cross-communication about the limitations on the part of both the carrier and shipper to create certainty for the other. So that kind of dialogue, whether it’s one-on-one or through these forums, has improved significantly in the last 12 to 24 months, and I think we’re all better for it.
HEALY: One key component that’s changed here has been our ability to secure what we call time-volume-based contracts with the carriers that allow us to lock in rates for 60 to 90 days with a weekly allocation guarantee and an associated fall-down penalty on the carrier and exporter for non-fulfillment of bookings. That’s been one of the key positives over the past 12 to 18 months.
JOHNSON: Relationships are everything. We spend a lot of money on keeping those relationships intact. We spend a lot of time visiting carriers and going to conferences to meet with them. We share a lot of information with them, and it’s a true partnership, we believe. We’ll ask them what we can do for them to improve their profits. Therefore, we get the best rates we possibly can. I think that’s what relationships are all about. That’s the same on the rail and truck side. With every mode, we have a staff member who’s in charge of those relationships. It’s among our goals every year, that we need to improve our relationships and make sure we are aligned with our carriers, and that they’re aligned with us.
JOC: That alignment, some people believe, should include long-term contracts. Do you see those as viable vehicles in the future?
JOHNSON: We’d like to see that. We’re not seeing carriers ask for that at this time. As you can probably guess, they’re looking for a recovery in the economy so they can increase rates a little more rapidly. We as shippers, however, are looking at that possibility and asking carriers to look at a two- or three-year contract. We’re not pushing it too hard, but are getting it on the table for consideration. At the same time, we’re very cautious about giving out a two- or three-year contract to carriers that don’t commit back to us in the same focus. When you’re giving out a long-term contract, you’re expecting quite a bit of commitment from that carrier, not only to stay with us, but also to go with us.
CHROUST: I would agree with that. The mind-set of shippers on contracts, as it relates to time, have lengthened, and there are a lot of lessons to be learned over the past several years about the importance of strong partnerships with your carriers. Many of the shippers who took advantage of carriers on pricing when capacity was very high were the same shippers who were shunned and took it on the chin when capacity was low, and they struggled to get some of their freight where they needed it to go. Those lessons stress the need to lengthen your discussions with carriers and to try to work together as partners. On that same note, I’d say that as retailers have had to decrease costs even further over the last several years, they’ve had to turn to their carrier partners for opportunities to innovate. It’s through those partnerships that they’ve been able to achieve some of those cost savings. And the emergence of sustainability as a trend that needs to be maintained also requires those strong partnerships.
GRENNAN: Carriers on the export side serve very different market segments. The forces that drive product into a container are different by market segment. The carriers understand they can prescribe different pricing schemes. A specific contractual freight need like “term” by a grain shipper can be significantly different than how you’re going to treat a business like Wayne’s, because the grain shipper needs to compete with something else, and that something else might drive unique treatment of a different contract variable. Contract nimbleness is what ag exports will need. I think the carriers are diligently working to be able to manage and think about all these different market segments and price accordingly. Their challenge on this issue is whether they and the shipper can actually execute through their organizations on different types of contractual commitments.
CHROUST: Any good carrier has their “need-to-drop shipper list.” They’ve identified those customers that are losing propositions for them. That’s something all shippers need to keep in mind while they’re negotiating these contracts and when they’re trying to get the best out of their carriers both now and in the long term.
JOC: Do you see a different dynamic on the international
economic scene, where the connection between international and domestic transportation in the U.S. may be a little more disengaged than in the past? We’ve seen strong volume growth on the domestic side, but that doesn’t seem to be matched on the international side.
GRENNAN: It’s just leverage. When I think about being a steamship company, there’s a lot of sea out there. Building a bigger boat or adding a lot of boats is really an individual investment decision. At the right margin, you can add a lot of capacity. That’s not the case when you’re talking about building a new railroad across the United States. It’s a lot easier to add capacity on water than it is to add capacity on land. That reality is what drives the disconnect. They’re different marketplaces.
JOHNSON: We’re seeing truckload carriers boost prices as best they can. They’re taking advantage of tight regional markets. We’re seeing rates way above normal on a spot market basis amid a heavy shortage of trucks in some areas. That’s causing inflation. On the LTL side, we’re starting to see a steady increase, whereby the carriers look to be increasing their rates on a yearly basis. In 2012, you’ll see a 3 to 4 percent increase, and maybe a little more than that. I think you have to ask yourself what happens if YRC makes it — or doesn’t make it. If they do make it, I think you’ll see that 3 to 4 percent. If they don’t make it, it’s a different story. You could see rates jump significantly.
JOC: The International Longshoremen’s Association will be negotiating a new contract this year for East and Gulf Coast ports, the first contract under new President Harold Daggett, who has promised a more militant stance. Are you concerned about the impact of potentially contentious talks?
CHROUST: Anything that can lead to a strike and hinder the movement of goods is not a good thing. On the flip side, our retailers have proved they have successful diversion programs they can implement and utilize when they need to. If you look at some of the activities of the recent past on the West Coast, and how quickly retailers were able to divert products into other ports and take advantage of the path of least resistance, they did that successfully. So that’s a definite contingency option for them to think through. Obviously for those retailers that have larger footprints in the Gulf and East Coast states, it becomes more problematic. But again, retailers have proved they can find alternative paths when they need to.
JOHNSON: I don’t think we’re going to see very much activity at the ports on the part of labor. They’re still trying to recover from the losses they’ve had, especially in Los Angeles with the actions they took against the truckers and increasing shippers’ costs. I think you’ll see them being very hesitant in trying to strike or to go after management with too high of an increase in wages and benefits. You also have the Panama Canal issue coming a few years from now, and I think that’s going to cause labor to be very cautious, because West Coast ports could raise their costs to the point of making the canal a big issue, and you could see a lot of freight going east through the canal. I think all labor unions will be very skeptical and timid in their negotiations so as not to upset the traffic they already have coming into their ports. I think they’ll negotiate very fairly with management.
JOC: Are you making any contingency plans?
JOHNSON: Yes. We have ways to different ports. Besides truck and rail, we have barge backup plans. We learned our lesson, as many shippers did, back when Los Angeles had their problems. I think most shippers are that way. They have alternatives in place if something happens at one port.
GRENNAN: There are many ways to get a product, particularly a commodity, out of the United States. If you have a problem with a particular union at a particular port and you’re a network-sized company, you can shift to a different port or a different mode, including barge or breakbulk vessel. That doesn’t mean these things aren’t painful, but they’re not crippling to the point of shutting you down.
JOC: Has the National Export Initiative helped your business?
GRENNAN: The NEI is a matter of attitude — and a good attitude. In terms of the action plans in the ag export market, though, the global commodity market itself still drives trade flows. There’s more financing available through the export-import banks and various ag export programs where we can promote exports by guaranteeing loans to buyers of ag products, so that’s a real action item that’s coming through the initiative. Many of those programs had been in existence, but the NEI attitude helps them stay in existence, or expand funding, so that’s a good thing. You’ll also see that attitude in various agricultural promotional councils that are charged with increasing demand for our various U.S. ag products around the globe. These councils get money from the USDA to spend on marketing efforts. When you have an NEI in place, it’s easier for those councils to retain their funds. Even as we see Washington get out their knives to cut budgets, we’re seeing those councils retain their funds. However, as already stated, actually moving the goods is still a market function. A year ago, we had good exports in a lot of different products. You can credit that to supply issues in South America, a relatively weak dollar and other macro factors. Here we are this year, and we could have one of the worst corn export seasons in terms of volume in 25 years. That’s largely because of supply surging outside the U.S. There are more grain products available for export in Ukraine and continually in South America, so we’re competing more and more to destinations in Asia. The National Export Initiative isn’t going to substantially change those significant currents.
JOC: What about the recently signed free trade agreements with, especially, South Korea and Colombia?
GRENNAN: As an ag exporter, it’s generally positive when you remove trade barriers. The South Korea deal is a particularly good one for the container business. We see the IP (identity preserved) soybean container business there growing because there likely will be a shift in procurement style from consortium block buying that favors breakbulk vessel to end-users buying directly in smaller lots, getting the type of specialty soybeans they need. This will favor container movements. The Colombia FTA is also positive, but the reality is that for bulk grains, the U.S. used to have more than
70 percent market share and it went down to less than 20 percent as Colombia joined free trade agreements with its South American neighbors. We lost a significant portion of that market, and it’ll be tough to get it back even after an FTA, simply because those countries in South America will supply Colombia far cheaper than we can. As it relates to containerization, I think it’ll be good for higher-valued ag feed and food products that have lower demand tonnages, such as DDGs, dairy products and pulses. There also will be a phasing out of tariffs affecting U.S. meat imports that in time will be supportive to container movement. It’s anticipated that some benefits will also be felt in container movements of ag machinery to Colombia.
JOHNSON: For us, it’s opened up a lot of markets as far as what’s the best origin sourcing country. While we can ship from this country and any country to another country, we can now measure the competition factors for all those countries together. In the past, we’ve had some restrictions on that because of tariffs and so forth. Now with the NEI and FTAs, especially with South Korea, we’re seeing a lot more competitive factors, so we have more sources and areas of competition we can look at for our products both inbound and outbound. We’re very pleased and excited, especially about South Korea.
JOC: Are you seeing any shortage of containers on the export side?
HEALY: Looking at the past year, I wouldn’t say capacity issues have necessarily eased, but we’ve been able to expand our origination and carrier network, which has increased our ability to load boxes. We’ve been able to capture more containers in the past year by being creative, developing street turn programs and working with importers to turn boxes around from imports to exports.
GRENNAN: We believe carriers are for-profit businesses. They will put boxes in certain locations when someone pays for an import to be brought in or when the export revenue opportunity is high enough to pay for repositioning of the empty, and likely for no other reason than that. If there’s an agricultural product for export nearby that can be reloaded into that box and compete, that’s where our capacity has value. Again, we’re the backhaul. I always say you’re never going to have enough containers that are competitively priced. What I mean by that is 95 percent of the bulk grains leaving the United States today leaves on a breakbulk vessel out of one of the grain terminals in the Gulf, Pacific Northwest or East Coast. So if steamship lines price their export freight cheaper than breakbulk vessel freight, there will always be complaints that they don’t have enough capacity — always, because the tonnage moving out of this country will always be greater than the carrier’s capacity to move it out of the country. So for us, the question about whether capacity is easing or tightening really means, is container capacity priced too high relative to breakbulk or is it priced too cheaply relative to breakbulk rates? The ideal scenario for ag container exporters is high U.S. imports and high-priced breakbulk rates, a scenario we saw in 2007 through 2008.
JOC: What environmental innovations and initiatives do you see coming in 2012?
JOHNSON: Some industries in the past have viewed environmental initiatives as a new cost center — in order to be green, you have to increase your costs. Today, a lot of shippers are viewing it as improved costs and better efficiencies, and therefore they need to find more ways of becoming more green and more sustainable. That’s how we look at it. One of the areas we’ll be pushing in the next year is alternative fuels for trucking. We’ll have LNG in Texas and Ohio on inbound products to our plants and will be expanding that to our outbound areas in trucking, on short-haul anyway. By 2013, LNG will compete more with diesel on long-haul freight. We’re also looking at dwell times at our plants, to get trucks on the roads faster, to keep them out on the road where they make the money.
JOC How does that move to alternative fuels affect your costs?
JOHNSON: We base the savings on LNG off the price of diesel. We have it written into our contracts and our rate system that allows us a saving per mile off the direct price of diesel. We’re kind of guaranteed that savings on an LNG truck.
CHROUST: On the transportation side, our retailers continue to work with drayage carriers, owner operators and licensed motor carriers at the ports to implement more clean trucks. Our retailers continue to expand their empty-miles programs. When they drop off a load, they’re looking to bring one of their loads or someone else’s load, even another retailer’s, back with them. We also continue to promote EPA Smartway, and encourage all our members to embrace the program. In terms of warehousing, our retailers continue to push capital improvement projects for energy management, lighting and green lift trucks. We also continue to see the emergence of public-private partnerships in terms of creating alternative energy around distribution centers, whether through solar panels or wind energy.
JOC: What impact is poor infrastructure in the U.S. having on your supply chain?
JOHNSON: The service from motor carriers has gotten worse, and one of the factors affecting that is the delay and congestion due to inadequate infrastructure. Hours-of-service and the specter of CSA have affected service, too, but we’re seeing a lot of situations where a carrier will tell us he’s gotten behind an accident or behind congestion in a city because of rush-hour traffic. We’re seeing tighter and tighter efficiencies on the part of carriers trying to maximize their units and making delivery times as tight as they can be. Therefore, any delay on the highway is a big problem for the carrier, and it’s a big problem for shippers who want on-time service. So we’re seeing service deteriorate, and I think one of those issues is the lack of infrastructure improvements in this country because Congress can’t get its act together on a new highway bill.
HEALY: I’d echo some of those things. There’s a tremendous amount of congestion around the ramps we serve due to longer drayage times and longer truck times. Whatever it is, it adds costs. As a commodity shipper, these kinds of costs are significant to our bottom line and significant to our performance. It just makes us less competitive in the world market. I hope D.C. can get the funding in the right spots and for the right projects.
CHROUST: It all comes down to money. Our infrastructure needs funding, and Congress can’t seem to fund a surface transportation bill. It’s a hard thing to do, and probably won’t happen in 2012 because it’s an election year. The result is increasing congestion and longer service times. There are so many areas of congestion that could be fixed easily if there were more money in the system. Quite honestly, shippers would be happy to help fund big freight projects of national and regional significance if we knew with absolute certainty that the money would go back to infrastructure. Unfortunately, all too often, funding comes from a certain source, and then it gets earmarked for another destination. That’s part of the problem.
JOC: How would your shippers be willing to pay for it?
CHROUST: Our members have supported an increase in the diesel tax along with groups like the American Trucking Associations. We feel that there may not be a one-size-fits-all approach. There is likely to be various degrees of funding from the public policy level, but one of the easier approaches at the moment is just to increase the diesel tax, but also make sure that funding is going back into freight-focused projects.
JOHNSON: I think the gas tax needs to be increased. Truckers and shippers are going to agree to that and readily throw in their portion. But we have to see a return. One of the things shippers, especially those of heavy products, want to see is an increase in size and weights of trucks. We have to improve trucks. One of the ways for the government to get extra revenue is to offer permits on the size and weights of trucks. If a carrier wants to put a 97,000-pound truck on the road, charge it a higher license fee or a special permit fee. That’s one way to get revenue to pay for infrastructure improvements. The same goes for LTL. LTL companies would like to see double-33-foot trailers on the road. Offer a charge or a permit fee for that. Shippers would be more than happy to see a portion of that charged back to them. There are definitely ideas out there to bring revenue to the government and help pay for infrastructure. We just have to bring Congress around to put them in place.
JOC: If you were to handicap the ability to overcome the huge lobbying effort against truck size-and-weights reform, what would it be?
JOHNSON: I’m going to say there’s a 40 or 50 percent chance of it happening in 2012. In the state of Maine, it’s going to happen, period, because the delegates of Maine have pushed it and put together a good program for it. They’re going to get those 100,000-pound trucks off the secondary roads near housing and put them on the highways where they belong. As for the entire country, those of us who have been in this battle for many years know it’s been opposed by the railroads. They have a huge lobbying effort in Washington to get this stopped. That’s been somewhat successful, but when capacity gets real tight on the highways this year, I think we’re going to see a renewal of this effort, and weights, especially, will become a very important issue to eliminate congestion on the highways. The weights, and even the sizes, of trucks will become a very big factor in Washington in 2012.
GRENNAN: As Casey said, private industry sees projects out there that they would take care of themselves. Their business plans show that they can afford to pay for what needs to be fixed. Public funding may not be needed; rather what might be required is the authority and access for private industry to fix it themselves. I think we need to open up that possibility in Washington, and allow private industry to solve the problem. The other crucial point Casey made is that if we don’t trust that money we put aside is going to be used to solve the infrastructure problem, and instead it gets swept into some other general fund to solve a different shortfall, then whatever the scheme is — collecting for heavier weights or charging for access or usage of the infrastructure — it just doesn’t matter. I think that if people did trust that it would be targeted for something specific, then business would get pretty serious about how to put money into it. Absent that trust, we’re going to struggle getting off the ground some of the private-public infrastructure projects out there.
CHROUST: Absolutely. Any program has to have transparency and closed-loop funding. We can’t have these pools of money going to other areas. We have to have a lockbox.
JOC: What do you hope we don’t get out of Washington? What are your regulatory concerns?
CHROUST: Where do we start? First and foremost is hours-of-service for truckers. That’s troublesome for all of our retailers, especially in today’s just-in-time delivery models. Any slight tweaks to hours-of-service and overnight rest time have a profound impact on our supply chains.
GRENNAN: When you’re looking at what can benefit or damage the ag export effort significantly, you have to look at the United States’ relationship with China. China consumes 25 percent of the globe’s soybeans. They need our soybeans. They are becoming a net importer of corn, and the U.S. is the largest corn exporter. Prior to the current dumping investigation, they were the largest importer of U.S. DDGs. All of us who are engaged in the containerized ag export business are always going to be subject to the increasingly complex geopolitical and trade policy decisions between our two nations.
JOHNSON: Changes in hours-of-service. Today’s motor carrier services are safer than they have ever been. Drivers, carriers and shippers have adjusted to the present hours-of-service, and all parties are working together to make trucking the most efficient it has ever been. Many studies prove the present HOS are working and there is a lot of support to not change them. Washington has many other issues to be concerned about that need their attention. They need to leave this issue as is.
JOC: How are China’s rising labor costs affecting your sourcing decisions?
CHROUST: Our retailers are considering alternative sourcing locations. They have greatly moved into other countries, especially Southeast Asia. Some retailers have either jumped ship entirely or implemented a China-plus-one strategy where they’ll continue to manufacture and source products in China but add a secondary sourcing location to provide additional leverage and mitigate supply chain risks, whether they be political, forces of weather or natural disasters. That said, China remains the No. 1 sourcing location, but there’s been a lot of activity in this area.
JOHNSON: We’ve moved into China heavily and are doing it more so. We think that’s the area of growth for us as we move forward in the Asia-Pacific market. We don’t think that’s going to be a hindrance to us at all. As a matter of fact, we think it’s going to be a very important part of growth as time moves on. We view it as a great opportunity as we look to source in China and other countries in the area. We’re very attuned to what’s going on there. We know China has come out and said it wants to double wages for employees who work there in five years. We are making plans to go along with that and will help make it happen at our companies over there in that area. We look at China as the growth area, not only for us, but also for the world, and we have to be aligned with what’s going on over there.
JOC: What about near-sourcing?
CHROUST: We definitely see retailers considering it. Not only are there sustainability benefits, but another benefit is time. When you have certain product sales tied to order cycle time — high fashion, for example — time matters. Near-sourcing will always have a competitive advantage on time. We definitely see some of our members exploring these options, and in some cases, moving to them.
GRENNAN: It’s important for us to pay attention to source shifting in emerging markets. We need to follow that trend as exporters from the U.S. We need to work to develop demand for our ag products in containers to those emerging sourcing points around the world.
JOC: Put yourself in 2013. What are your major concerns?
JOHNSON: Whoever is the new president has an unemployment issue that will have to be addressed quickly. I’m not sure there’s a solution until they cut off unemployment benefits to people who should not receive it today. We have a truck driver shortage in this country and we’re paying out all this money to people who are sitting at home who could be out there making $45,000 a year driving a truck, or being an engineer on a train and making $75,000 to $80,000. That’s one issue we need to face early on in 2013, whoever the president is, and get it out of the way.
CHROUST: Undoubtedly it’s a crucial time in America, and we need strong leadership. A great many challenges lie ahead, and there’s a lot at stake. Whoever becomes the next commander-in-chief, we hope they will have the fortitude to do what’s best for the country and the economy and will also assume a business-friendly tone and make some drastic improvements.